'Loopholes' available to most of us

So where were we? Oh yes, listening to all of the comments on many TV newscasts about the Big Companies getting all the tax loopholes so they don’t have to pay any income tax. We will get to discuss that issue in a future column, but first let’s see what is available for all of the other individual taxpayers; or non-taxpayers as it may be.

Anything that decreases taxable income is a “loophole,” but in reality it is an allowable deduction. The most cynical definition of a loophole is something some one else gets and not us. Here are a few items that we would not ordinarily consider in that category.

Would you consider the child tax credit which is directly subtracted from your income tax a loophole? Why not? Don’t tell that to someone who receives this benefit. Not everyone is in a position to claim the credit it as it applies only to those who have children under 17. This applies to approximately 39 million people filing tax returns and not just a chosen group.

How about the employee that works in a retail store where they are entitled to employee discounts and it is not considered part of their taxable income?

Even the government has created a “loophole” by encouraging certain forms of investments such as purchasing municipal or state bonds. The funds raised in this manner are used to pay for municipal needs, schools, roads and other civic projects. So to make this attractive to the investor, the interest earned on these bonds are not taxable. They are generally long term investments, so for the life of the bond all income is tax free. The same amount of money deposited in a bank CD would produce taxable income for the same period of time.

There is a special relief offered to those that are elderly and blind. They receive an additional deduction amount that is added to their standard deduction. But there is no special allowance for the deaf. In addition there is a retirement income credit and the possibility to reduce their Social Security payments from being part of their taxable income.

All of us that contribute to an individual retirement account (IRA) or a 401(k) or some similar plan are deferring our income to a future date and are creating our own “loopholes.”

There are more individual investors owning mutual funds than ever before. The dividends earned by your holdings are taxed at a lower rate than ordinary income.

And how about capital gains? Every time I hear some one say, “Gosh, I have to pay capital gains on my sale,” I want to congratulate them. Long term capital gains are taxed at the lowest tax rate than other types of income. The gain on a sale of a house up to $500,000 escapes taxation after meeting certain conditions. Would this classify as a loophole?

If your employer pays for the premiums on the health insurance policy that you have with the company, you do not pay any tax on this benefit. You are allowed to take a deduction for your personal long term care premiums and not report the income when received.

So as you can see, there are more middle class loopholes than we realize. More to come.

OBSERVATION

As one tea partier said recently, “As a potential lottery winner, I support tax cuts for the wealthy.”

Edward J. Loughrey, CFE, EA, LPA, can be reached at ejltaxes@gmail.com or at (843) 705-7258.